The bank has total assets of 967,151 and total liabilities of 902,027. The shareholder's equity is...

The bank has total assets of 967,151 and total liabilities of 902,027. The shareholder's equity is 65,124. all the amounts are in millions. the debt to equity ratio will be 13.85. so, what does 13.85 mean?

This data is taken from a legit bank from its balance sheet but can debt to equity ratio be 13.85 for good banks?

Solutions

Expert Solution

- As per the golden rules of accounting, Assets = Liabilities + Capital

here, for this Bank's case, this is satisfied as assets (9,67,151) = liabilities (9,02,027) + capital (65,124)

- debt to equity ratio represents the portion of debt used by a Company in financing its assets to its equity.

Formula= outside debt/ shareholders' equity

- A high debt to equity ratio shows high financial risk, meaning that the company has been using higher levels of debt in its capital structure. Debt entails a lower cost of capital as compared to equity and hence many corporates prefer using debt as a part of financing. However too much debtbeing used by the company can have negative effects on the company due to fixed interest payment obligations and the company can even move into bankcruptcy for the same if profits are not adequate to pay off the interest.

- DE ratio of 13.85 means that company employs 13.85 debt for every $1 of of equity being used. This is an extremely high level of DE and mostly such high levels of debt should not be employed by good Banks. The bank is presumably expected to have extremely high financial leverage and high levels of bankruptcy risk, thus proper measures should be taken by Bank's management to bring down debt levels and use equity capital instead to fund its long term assets.

jeff jeffy answered 1 year ago

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